Virtuous Circles and the Case for Aid

Citation

Abstract

It is sometimes argued that foreign aid leads to a virtuous circle in which growth becomes self-reinforcing. We study two versions of this argument, using a modiﬁed neoclassical growth model in which the eﬀects of parameter changes and capital accumulation are ampliﬁed. Simulations are used to quantify the welfare beneﬁts from aid transfers. We ﬁnd that, contrary to expectations, ampliﬁcation makes only a modest diﬀerence to the welfare beneﬁts from aid. This is true even when aid allows a faster exit from a vicious circle or poverty trap.